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Tax treatment for family members working in the family business


One of the advantages of someone running their own business is hiring family members. But when including family members in business operations, certain tax treatments and employment tax rules apply. Here are some facts the IRS wants you to know when working with a spouse, parent or child.

Both spouses carrying on the trade or business

If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065. They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. But, the spouses can elect not to treat the joint venture as a partnership by making a qualified joint venture election.

Qualified joint venture

Spouses may elect treatment as a qualified joint venture instead of a partnership. A qualified joint venture conducts a trade or business where:

  • The only members are a married couple who file a joint return,
  • Both spouses materially participate in the trade or business, and
  • Both spouses elect not to be treated as a partnership.

Only businesses owned and operated by spouses as co-owners and not in the name of a state law entity, such as a limited partnership or limited liability company, are eligible for the qualified joint venture election. Find more information on joint ventures in Publication 541, Partnerships.

Spouses electing qualified joint venture status are sole proprietors for federal tax purposes. Each spouse must file a separate Schedule C to report their share of profits and losses. They don’t need an EIN unless their sole proprietorship must file excise, employment, alcohol, tobacco or firearms returns. One spouse cannot continue to use the partnership’s Employer Identification Number (EIN) for the qualified joint venture. The EIN must stay with the partnership; it’s used by the partnership for any year in which the business doesn’t meet qualified joint venture requirements.

Employment taxes

If the business has employees, either of the spouses as sole proprietors may report and pay the employment taxes. The spouse, as an employer, must have an EIN for their sole proprietorship. If the business filed or paid employment taxes for part of the year under the partnership’s EIN, the spouse may be considered the employee’s “successor employer” for purposes of figuring whether wages reached the Social Security and federal unemployment wage base limits.

One spouse employed by another. The wages for the services of an individual who works for their spouse are subject to income tax withholding and Social Security and Medicare taxes but not to the Federal Unemployment Tax Act (FUTA).

Child employed by parents. Payments for the services of a child under age 18 aren’t subject to Social Security and Medicare taxes, if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments to a child under age 21 aren’t subject to FUTA. Payments are subject to income tax withholding, regardless of the child’s age.

Payments for the services of a child are subject to income tax withholding as well as Social Security, Medicare and FUTA taxes if they work for:

  • A corporation, even if it’s controlled by the child’s parent, or
  • A partnership, even if the child’s parent is a partner, unless each partner is a parent of the child.

Parent employed by child. The wages for the services of a parent employed by their child are subject to income tax withholding and Social Security and Medicare taxes. They’re not subject to FUTA tax.

Employees complete Form W-4 so that their employer can withhold the correct federal income tax from their pay. The IRS encourages everyone to use the Tax Withholding Estimator to help them make sure they have the right amount of tax withheld from their paycheck. The estimator automatically links to Form W-4, Employee’s Withholding Allowance Certificate, which they can then fill out and submit to their employer.


Can divorced parents both claim head of household status?


The rules for determining filing status are not the same as the rules determining which parent can claim a child dependent to get the various tax benefits associated with who gets to claim which child as a dependent.  Under the special rules for children of divorced or separated parents, only the parent where the child lives more than half the nights of the year can use the child as a qualifying person for head of household (HOH) status.  There is no release mechanism for splitting HOH filing status.  Only one parent can claim it based on the physical presence test mentioned above.  Even in a 50-50 custody split, one parent only needs to have the child for one night more than the other parent to satisfy the test for using HOH status. 

So for the IRS, there is no 50% custody, you have to count nights, and one parent will almost always have more than the other.  If for some reason the # of days is exactly equal (like in a leap year, 366 days, exactly 183 nights for each parent) then the tax benefits are assigned to the parent with the higher income.

If the divorce decree says that the non-custodial parent (parent with less than 50% time) gets the dependents in a certain year, the custodial parent must fill out and sign a copy of form 8332 and give it to the other parent, this releases the tax benefits to the other parent. However, the form 8332 only transfers the dependent exemption and the child tax credit.  Eligibility for Head of Household, Dependent Care Credit, and Earned Income Credit (EIC) always stays with the custodial parent and can not be transferred

There are a few rare cases where it could be possible for both parents to file as Head of Household in the same tax year.  For example, if there are two children, one child spends 51% of the year with one parent, and the second child spends 51% of the year with the other parent, both parents may be able to file as Head of Household in the same tax year.  If you feel like you and your ex-spouse qualify for this exception, you will need to keep very careful records of where the children spend their days and nights throughout the year.

You should keep a “child custody log” because there is a good chance that both parents filing as HOH post-divorce will trigger an audit by the IRS.  But there is nothing guaranteeing that a child custody log by itself will satisfy the IRS in the event of an audit. The IRS could request additional information to determine that the 51% time requirement was met by each parent.


IRS Says All Tesla Electric Vehicles Now Qualify For Tax Credit

IRC section 30D provides for a credit for certain new qualified plug-in electric drive motor vehicles. The base amount of the credit is $2,500. The credit is increased by $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours, limited to $5,000.
Thus, the maximum credit for the purchase of a new electric powered vehicle is $7,500. The credit begins to phase out in the second calendar quarter after the calendar quarter in which at least 200,000 of a manufacturer’s vehicles that qualify for the credit have been sold.
Taxpayers purchasing the manufacturer’s vehicles during the first two calendar quarters of the phase-out period may claim 50% of the credit, and 25% of the credit during the third and fourth calendar quarter. After the last day of the fourth calendar quarter of the phase-out period, the credit is zero. The IRS issues a Notice when a particular make and model of an electric vehicle reaches 200,000 in total sales and thus begins to be subject to the phase-out period.
The IRS has announced that Tesla, Inc. has cumulative sales of qualified electric vehicles that have reached the 200,000 limit during the calendar quarter ending September 30, 2018. Accordingly, Tesla electric vehicles sold after January 1, 2019 are subject to the credit phase-out. The following list identifies the amount of credit available for the purchase of a new Tesla electric vehicle depending upon its purchase date.
  • If purchased prior to January 1, 2019, the full credit is $7,500.
  • If purchased between January 1 and June 30, 2019, the credit is $3,750.
  • If purchased between July 1 and December 31, 2019, the credit is $1,875.
  • No credit if purchased after December 31, 2019

If you have any questions, please contact Steve Siesser at


How Back-Up Withholding May Impact You

IRS Pub. 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), is now available on It has been updated to reflect a key change made by the Tax Cuts and Jobs Act. As a result of this change, effective January 1, 2018, the backup withholding tax rate dropped from 28% to 24%. In general, backup withholding applies in various situations including, but not limited to, when a taxpayer fails to supply their correct Taxpayer Identification Number (TIN) to a payer. Usually, a TIN is a Social Security Number, but in some instances, it can be an Employer Identification Number. Backup withholding also applies, following notification by the IRS, where a taxpayer underreported interest or dividend income on their federal income tax return.
IRS Pub. 1281 contains information designed to help any payer required to impose backup withholding on any of their payees. Among other things, the publication features answers to 34 frequently asked questions (FAQs). One of them, FAQ 34, points out that a payer who mistakenly backup withheld at an incorrect rate (such as the old 28% tax rate, rather than the new 24% rate), need not refund the difference to the payee. However, a payer who chooses to refund the difference must do so before the end of the year and can then make appropriate adjustments to their federal tax deposits.
When backup withholding applies, payers must backup withhold tax from payments not otherwise subject to withholding. Payees may be subject to backup withholding if they:
• Fail to give a TIN,
• Give an incorrect TIN,
• Supply a TIN in an improper manner,
• Under-report interest or dividends on their income tax return, or
• Fail to certify that they’re not subject to backup withholding for under-reporting of interest and dividends.
Backup withholding can apply to most kinds of payments reported on Form 1099, including:
• Interest payments,
• Dividends,
• Patronage dividends, but only if at least half of the payment is in money,
• Rents, profits or other income,
• Commissions, fees or other payments for work performed as an independent contractor,
• Payments by brokers and barter exchange transactions,
• Payments by fishing boat operators, but only the portion that’s in money and represents a share of the proceeds of the catch,
• Payment card and third-party network transactions, and
• Royalty payments.
Backup withholding also may apply to gambling winnings that aren’t subject to regular gambling withholding. To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the underreported income and pay the amount owed, or file a missing return. Payers report any backup withholding on Form 945,
Annual Return of Withheld Federal Income Tax. The 2018 form is due January 31, 2019. For more information about depositing backup withholding taxes, see Publication 15, Employer’s Tax Guide. Payers also show any backup withholding on information returns that they furnish to their payees and file with the IRS.



Social Security and Supplemental Security Income (SSI) benefits for more than 67 million Americans will increase 2.8 percent in 2019, the Social Security Administration announced today.

The 2.8 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 62 million Social Security beneficiaries in January 2019. Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2018. (Note: some people receive both Social Security and SSI benefits). The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.

Some other adjustments that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $132,900 from $128,400.  The tax rate on Social Security wages and self-employed net income remain unchanged.

The 7.65% tax rate is the combined rate for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum amount (see below). The Medicare portion (HI) is 1.45% on all earnings. Also, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9 percent in Medicare taxes. The tax rates mentioned above do not include the 0.9 percent.

Social Security and SSI beneficiaries are normally notified by mail in early December about their new benefit amount. This year, for the first time, most people who receive Social Security payments will be able to view their COLA notice online through their my Social Security account. People may create or access their my Social Security account online at

If you have any questions regarding this info, please contact Steve Siesser at